This article goes a step deeper by working through a few examples of estimating the social media ROI.

Why Estimate a Return?

Before we go any further, let’s review why we need the social media return and ROI again.

You use the return and the ROI to compare the efficiency of marketing campaigns; for an in-house team, you can use these numbers to negotiate budgets with your management; for agencies, you can use estimated numbers to land prospective clients and to retain current clients. The numbers are used in conjunction with social and web metrics to analyze and optimize current and future campaigns.

Last but not the least, a primary reason for using the return and the ROI is social media financial accountability. As social media initiatives become mainstream, executives are holding them to the same accountability as other business initiatives, demanding financial returns and ROI on social media investments.

In the article mentioned above, I also said that the ROI calculation is easy; you simply use the financial ROI formula. The tough part of social media ROI is to tie a hard-dollar value to the social media return.

How Should I Estimate My Return?

So, how do you estimate the social media return?

In this post, I will show how the social media return can be estimated. As I work through these examples, it’s important to remember that I can only estimate the social media return and ROI—as in most areas of marketing, exact numbers are not possible.

ROI month-over-month trending.

To estimate the social media return and ROI, you need to start with a 3-step process:

Define your social media goal.

Based on the goal, define your social media return.

Finally, define how you will tie hard dollars to the social media return.

So let’s get started with estimating your social media return and ROI!

To show how we can estimate your social media return and ROI, I will use three examples: return on sales, return on consumer insights and return on customer support.

Social Media ROI on Sales

In this case, we are tasked with estimating the ROI on sales. The tricky part is to attribute sales to social media.

Using the 3-step process, we first define our social media goal as “we want to increase sales.” Second, based on the goal, we’ll define the return as the value of sales that can safely be attributed to the social media campaign. Third, the hard-dollar value is the amount of sales dollars.

The second step in the 3-step process—attribute sales to a social media campaign—is hard to do. How can you safely attribute sales to a social media campaign? Getting accurate numbers is tough, but we can estimate sales by employing a few different methods.

The first method is to look at is last-touch sales, which means that by using our web analytics program, we can follow a user upstream from the online check-out counter to where the user entered the stream. If the user entered the stream from one of our social media touch points, we can attribute that user’s sales to our social media campaign.

A second method is to provide our users with social media campaign–only coupon codes, which means that if a user checks out with this coupon code, we can attribute that sale to our social media campaign.

A third method, which is a bit more involved, is to forecast the value of our sales without a social media campaign. During the campaign, we compare actual sales with forecasted sales and assuming that the actual sales are higher than the forecasted sales, we can use the difference as the value of our social media return.

Sales gap analysis.

Each method is good; however, a combination of methods could give us a more accurate picture.

Now, the last step in the process is to declare that the amount of sales that you attribute to your social media campaign is in fact your social media return. Based on the cost of the campaign, you can quickly calculate your social media ROI using the standard financial ROI formula.

Social media ROI = (return – investment) / investment %.

For example, during last month, we estimated that we could attribute $2,500 in sales to our social media campaign. This is our social media return. Let’s assume that our investment in our social media campaign was $1,000. Using our ROI formula:

Social media ROI = ($2,500 – $1,000) / $1,000 % = 150%

This means that for the last month, we estimate that our social media ROI is 150%.

Social Media ROI on Consumer Insights

In the second example, we will try to estimate the social media return on consumer insights.

Using the 3-step process, we first define our social media goal, which in this case is to generate a high number of high-quality consumer insights from our social media campaign. Second, we define the social media return as the value of these consumer insights. Third, we’ll tie hard dollars to the return by comparing what it would cost to generate the same quantity and quality of consumer insights using a focus group.

Here again, we run into the same problems as with sales: How do we attach a hard-dollar value to consumer insights?

The answer is that we use consumer insights equivalency. We know the cost of a focus group. We also know the number of acceptable consumer insights per focus group. Based on these two numbers, I can estimate the cost per consumer insight.

Over the course of a month, based on what our users are saying to each other and to us on social media, we count all consumer insights that we determine to be of equal or higher quality as the consumer insights from a focus group. Based on this count and the per-insight cost, we can determine the value (the return) of our social media presence.

Using the standard financial ROI formula, we can quickly calculate the ROI.

For example, in a particular month, say the return on consumer insights is estimated to be $900 and the investment during that month was $600. Using the ROI formula:

Social media ROI = ($900 – $600) / $600 % = 50%

So the social media ROI on consumer insights for this particular month was estimated to be 50%.

Social Media ROI on Customer Support Calls

In the last example, we will calculate the social media return and ROI on customer support calls.

Using our 3-step process, we first determine the goal of our social media campaign. In this case, our goal is to save customer support dollars by minimizing the number of calls that our customer support group needs to handle. Second, we define our social media return as the amount of dollars saved. Third, we tie a hard-dollar value to the savings by multiplying the average cost per call with an estimated number of calls that we avoided by using our social media presence.

Any customer support group should know exactly the cost of an average call. In the U.S., the average support call cost is approximately $10 to $25 per call, depending on the product, services and the vertical.

It is tough to estimate the number of avoided support calls; nevertheless, we will present two methods.

First, Charlene Li and Josh Bernoff, in their national bestseller Groundswell, walk through a customer support cost analysis based on cost savings from a community forum. The authors base their estimates on parameters such as the percentage of customers joining the forum and the percentage of customers finding answers on the forum. The outcome of the analysis is the annual cost savings from avoided calls.

Another way of estimating prevented calls is similar to our sales estimates. We forecast the number of calls without social media. Over time, we measure the actual number of support calls. The number of prevented support calls is the difference between forecasted and actual support calls.

Support call gap analysis.

Based on the social media return and the social media investment, it is again easy to calculate the social media ROI using the financial ROI formula.

Conclusion

We laid out three ways of estimating the social media return and ROI: sales, consumer insights and customer support. It is important to note that a social media campaign does not need to include all three social media returns. In fact, most campaigns don’t. The primary take-away is that your social media return and ROI depend on the goals of your social media campaign.

So what do you think? Do these three ways of estimating the social media return and ROI make sense to you? Can you use them in your business? How do you estimate the return and ROI today? Leave your comments and questions in the box below.

Dag Holmboe is the CEO of Klurig Analytics. Klurig develops methodologies and applications to analyze and estimate the return value and ROI of social media campaigns for brands and agencies. Other posts byDag Holmboe »

As a finance guy, it is great to see ROI equations! And certainly as the company is larger and there are CFO types lurking about, positive ROI’s can make the difference between a “go ahead” project or a “discontinue at once” one.

The biggest issue, as you mention, is that coming up with some of the numbers may be “somewhat soft”, meaning they are based on estimations and/or assumptions. Depending on the organizational environment, these may or may not be “allowed” in the ROI equation..

On the other hand, while the ROI calcs are based on hard dollars, there also might be an option element to them. Options are valuable, and there are methods to price them, but again, some companies will ignore these and some will pay attention to them.

I am happy to see ROI enter into the lexington of social media, however, I must admit that the ROI examples provided above do not resonate. There is no such thing as ROI on “sales”, “consumer insights” or other such metrics. ROI is Return on Investment. Return is defined as PROFIT — not sales or anything else. Investment is the total cost associated with an initiative. ROI on Sales as a result is a misnomer.

The Return in ROI can be a function of higher profits (through incremental sales) and/or lower cost of providing services. The soft factors are contributors to higher revenue and lower cost of service, but they cannot replace the ‘R’ in ROI.

Dag Holmboe

Hi David, thanks for the comment. Also, I took a peek at your blog – good posts.

I believe that social media marketing is currently in a transitional time where we are switching from an exploratory model to a financial model. We have spent a fair amount of time on social media and we have learned, to a certain degree, what works and what doesn’t.

The experimentation has led us to where the CFO of your company and the client of your agency is starting to demand accurate or at least reasonable estimates on the return of your social media spend. Thus, this article is pointing out a few different ways to provide return and ROI estimates.

Best

http://twitter.com/photosims Monica Sims

This is a great article, Dag. I loved the examples and how you gave examples for three different areas of an organization. This is very helpful since social media is not confined to just one department but really needs to be a company-wide initiative.

iContact’s Peter Ghali has a white paper on this same topic that you might find interesting as well. You can see it here: http://bit.ly/qQx5P8

Thanks again for the great article, Dag!

http://www.trustemedia.com Tracy Terry

Great post, Dag. I’m going to have to come back later and see if I can utilize your equations. Thanks for an advanced post. Tracy

http://www.sideraworks.com/ Matt Ridings – Techguerilla

On the one hand, I applaud efforts at tying *value* to activity of any kind. On the other, *value* estimation is in no way *ROI*. The words “ROI on Sales” (and the others) simply make no sense. ROI…is ROI. You can’t redefine its meaning to fit your needs. Call it anything else in this article and I’d have no issue with it. It’s like trying to say the ROI of Customer Lifetime Value…it’s a nonsensical statement.

Cheers,

-Matt

http://coupsmart.com/ Nick Sweeney

Hi Dag,

Very thorough article. I wholeheartedly agree that you need to do some ‘soft’ estimation when you first start your social media tracking, but ‘soft’ returns are messy. I like the gap measurement between estimated and actual, but even that doesn’t tell the whole story.

I work at CoupSmart, which gives exact measurement to social media offers, so a company can know for certain how many online fans became in-store customers with every deal. We also give analytic tools for the businesses so they can measure exactly what works and what doesn’t and hone their offers accordingly.

I don’t mean to sound mean or inconsiderate because you obviously put some time into this post, but it’s way off the mark. I don’t get the sense that you actually understand what you are writing about.I’ll explain this as concisely as I can: Tying ROI to social media is no different from tying it to anything else. ROI is activity-specific. You invest in an activity (a program or campaign being an amalgam of activities and resources to make those activities possible), and measure the financial impact of that activity. You then use the ROI equation listed in your post to calculate the return on that investment. In every case, you are looking for either a cost reduction or an increase in revenue.The very notion of the terminology you use here (“Social media ROI on customer support calls,” for example) is off. ROI is ROI. It’s simple. It’s media-agnostic. It doesn’t change when applied to social media. You’re not on the right track with this at all. Keep working at it. You’ll get it eventually.PS: Consumer insights equivalency? Seriously?

http://thebrandbuilder.wordpress.com olivierBlanchard

Dear Social Media Examiner,

I dig you guys because your readers are nice to me, but… might I suggest that you go through your contributors’ posts to make sure they aren’t just filled with nonsense?

Don’t feel too bad, the Harvard Business Review is having the same problem when it comes to social media articles, but… this is your specialty. Know what I mean? Go through this stuff. Put an editor on it. Check your sources and your content for accuracy.

Cheers,

Olivier

Dag Holmboe

Thanks for the comments Serge, Matt. Good comments.

Since the past few years, there is an ongoing discussion about the social media ROI. In many blog posts and even in some product descriptions, the social media ROI has been defined in any number of erroneous ways, for instance, number of fans or followers, number of clicks, rate of increase in fans, followers and clicks. This is not ROI. Instead, ROI is simply the Return on Investment and it is calculated by the standard financial formula: (return – investment) / investment %.

The “return” is the value of the benefit gained based on an action. So, Serge, you are correct that the return is profit. You are also correct that the return can also be lower cost of providing services. The lower cost of providing services is an important part of social media and in the article I use the lower cost in customer support as an example.

Dag Holmboe

Matt, thanks for the comment. Please see my reply to Serge above. Thanks.

http://twitter.com/EricaConroy Erica Conroy

Hi Dag –

Interesting post to say the least.

The company that I work for gives an actual ROI on social media like you were saying in the section on social media ROI on Sales. We track people from social media to an in-store purchase. It is fraud proof, trackable and has all real time measurements on what people coming from social media to your store.

I am not trying to give a sales pitch and but I think if you analyzed it through ACTUAL clicks, views, shares and redemptions you would have a lot more success proving your ROI.

I have all sorts of solutions that would be better than soft analytics and playing a guessing game. It also takes a lot less time because it is all available on a dashboard for companies and businesses to view instantly.

These kind of analytics can help you target key demographics, key markets, ways to enhance your social media presence and viral marketing efforts. It give social media strategy a whole new meaning.

http://twitter.com/EricaConroy Erica Conroy

Hi Matt –
I agree. Dag made some great points but I think that people need to start utilizing the tools that are already out there that can do these things for them in real time. Return=Return, I totally agree and there is a great value in customer loyalty.ROI can be tracked through social media since you are investing time, energy and resources on it. Monetizing social media should be goal #1 of any brand or company if there are putting time into this at all. Customer value is not ROI.This is exactly what my company does and I still have been trying to find a more powerful social media tool for any company. I have been looking for a while now and can’t seem to find anything like it. CEO’s or social media managers need to start demanding this so they are not wasting time or money. Best, Erica Conroy

Thank you for your article. Your suggestions are simple and easy to implement.

http://www.smallbusinessitshow.com/ Dexter Eugenio

thanks dag.

this is a super touchy subject which has been brought up in just about every board, blog, website i visit.

i honestly believe that in 2-3 years from now social media will just be but a blip in the cosmos and it will just be as accepted and as essential as mobile phones, the internet, and a website is to a business.

do you do the ROI on these things as well (mobiles, websites, etc)? maybe, maybe not, but I have a feeling that trying to quantify social media now is a waste of time given the metrics and intangibles involved.

what could be more insightful is measuring the ROI on different social media itself. introduction of youtube videos, or punching out tweets, i dunno.

personally, the time it takes to measure the ROI on social media to the nth degree, should be used in updating your social media profile itself.

dEx @gossipism:twitter

http://www.socialmediaexaminer.com/ Michael A. Stelzner

Olivier – I welcome you to write for us and know this is your wheel house. You know how to reach me…

jbshort

Great job, Dag. You’ve taken on a difficult task. It’s never been easy to estimate the ROI from customer relationship or satisfaction programs – online or offline.

In my long traditional marketing experience, senior managers of a company had to take a leap of faith in order to approve these programs and then give them the time to succeed.

The question has always been, “How will we measure success?” It wasn’t an easy question to answer, and we often had to fall back on “soft” metrics, such as higher customer satisfaction and retention. Without the ability to truly measure ROI, we were often forced to end our programs prematurely when funding was cut.

Finding ways to truly measure ROI success will go a long way to convincing companies to put and keep their budget in social media.

Olivier,
Maybe it’s that straight forward for people working in direct sales. But try valuing a return on the investment of staff time to do a branding exercise. Not focused on delivering profit for a not-for-profit company or focused on saving money as the company doesn’t sell products. I think the post is very thought provoking for companies who need to value their investment by something other than direct sales.

http://www.Optirate.com/ Serge Milman | Optirate

The ROI calculations for branding are no different. Consider that the only reason to engage in a branding efforts is to increase market share, number of customers, wallet share and revenue in general. EVERY marketing effort must be measurable… if not, the problem could lie in a) lack of capability / skill / tools of measuring performance, and or b) lack of performance that is to be measured.

George Anastasakis

Dear Dag, I found your article quite interesting, side social media is huge issue in my country (Greece) and people are starting to talk about social media ROI and if it is possible to estimate it. Moreover, clients need “proof of investment” and the article is (at least) suggesting some ways.

I understand that any outcome of the equation with + sing is a positive one, still how one can create a index? Let’e take for example the first case social media ROI on sales. Of source, one need to make the calculation through a specific time person in order to compare results. Do you produce index from that outcome of you set goals ie. outcome more than 100% in order o characterize the activity as exceptional?

MAdan Mohapatra

Hi Dag,
Great article with simple methods of measuring the Social Media ROI! However my question is “Isn’t it too early to start evaluating Social Media through ROI lens?” I feel this is a phase where social media should be nurtured and the boudaries should be exploited to understand the power and in the process few principles for measurement. Once we go through this phase, the evaluation can start and advertising bucks can be allocated basis merit rather than pure assumption.

http://www.Optirate.com/ Serge Milman | Optirate

ROI is typically compared to the hurdle rate. The hurdle rate is the minimum rate of return required for any investment (not just related to marketing activities). For most companies, the hurdle rate is equivalent to the cost of capital (eg. WACC as it is known to corporate finance professionals) — which for most companies will be somewhere between 7% – 10%.
Thus, if the projected ROI (where the ‘R’ is profit not revenue or anything else, and ‘I’ is the total cost including 3rd party costs and internal / overhead costs) exceeds 7% – 10% than you have an initiative that is financially justifiable. (PS: if you are seeing ROI of 100%+ it most likely indicates that you are overstating profit and/or understating costs)

Gordon Aymar

A great article! I think that all CFO’s look at ROI because it is easy to understand. Every large company I have read about has a hard time utilizing social media tools to quantify ROI. Lets forget the term and look at monetization of Social Media, amuch better word. We can utilize all of the same information mentioned above to either garner a savings or track an increase in revenue or whatever other metrics are used. The important thing is to pick metrics that are most easily measured or compared against other means of gathering the same information.

Great Post! Here in Brazil, the company where I work (www.rmacomunicacao.com.br), we have several offers social media, such as Content Management, SEO, Monitoring, etc.. The problem is still the ROI!

http://pulse.yahoo.com/_MTVTPABLFWLC4AZDK76GIIMOIA Alabi

Aim of business is profit generation and the better if it is maximize. This is done by input of resources and output of resources. Input resources can be labour, raw material etc. Output resources is mainly cash from sale revenue or service fee. To maximize profit you want to reduce input and increase output. While spending on Social Media is an input, business manager will want to know how such expenditure will increase output thereby increasing profit. Your article on measuring the financial impact of Social Media is a good one for business managers that have not seen it usefulness. Many of such manager are complaining of not wanting to spend money on an area you can not measure performance. In a Finance Management class I think your article would have been better titled ‘Performance Management of Social Media’. Beautiful work I love it.

The only problem with this view of social media is that it’s instantaneous rather than compounding. As your social media efforts grow, your ability to get greater return with each campaign increases. It’s a lot like compounding interest. If, on Day 1, you do a Twitter campaign… your ROI may be 0% or even negative. But on Day 365 when you have 5,000 followers, the ROI increases because you already have an engaged following.

On the right track, love the artical and love the comments more. Roi is roi and nothing else, the formula works but only if you want to measure the effect of a social media tactical implentation on sales (ie couponing ) Not branding or good will, we will save that for the regression models. Simply put, you spend a dollar to make two, and you need to measure to justify the costs. You can’t manage what you can’t measure. It’s better to pick a social media tatic that you can measure rather the one you can’t, even if you think the non measuable tatic is a better one.

Neil Ascher

Social media campaigns are not conducted in isolation. How would you possibly attribute sales when there is also mass media involved?

Neil Ascher

Social media campaigns are not conducted in isolation. How would you possibly attribute sales when there is also mass media involved?

http://wickedying.com/ Wicked Ying

Nice article but I think, when it comes to business and social media, there’s no definite equation on how to compute ROI.. It all depends on your brand, the consumer, site traffic, and the services you offer.

http://wickedying.com/ Wicked Ying

Nice article but I think, when it comes to business and social media, there’s no definite equation on how to compute ROI.. It all depends on your brand, the consumer, site traffic, and the services you offer.

http://pokerknave.com PokerKnave

Social media is such a big area i sometimes get lost! Maybe using real life examples would help illustrate your point more.

http://pokerknave.com PokerKnave

Social media is such a big area i sometimes get lost! Maybe using real life examples would help illustrate your point more.

Ken Jefferson

There is one way to determine your ROI, by using a tool that guarantees results, You only pay a percentage based on results. However we have a way that your return can actually be INFINITE, this is done not only you using our platform, but referring your customers to our platform. Then when thy buy anything from any other of the 30,000 business on our platform you get paid. We signed up the 30,000 businesses in 3 months without this latest enhancement of paying businesses for their referrals, so how fast we will grow now ? Prior to this we were growing 4 times faster than Facebook, and 7 times faster than Groupon. I just signed up 2 Multi Millionaires with many very successful Businesses and Franchises. One of them said “Anyone that doesn’t do this, just does not understand business”, you need to check this out a closed mind is the most expensive thing you can own Hwre i a 2 minute video that explains everything but the latest enhancement of paying you for referrals. http://www.dailyreferralbusiness.com Call me with any questions Ken Jefferson 305-407-1960

Ken Jefferson

There is one way to determine your ROI, by using a tool that guarantees results, You only pay a percentage based on results. However we have a way that your return can actually be INFINITE, this is done not only you using our platform, but referring your customers to our platform. Then when thy buy anything from any other of the 30,000 business on our platform you get paid. We signed up the 30,000 businesses in 3 months without this latest enhancement of paying businesses for their referrals, so how fast we will grow now ? Prior to this we were growing 4 times faster than Facebook, and 7 times faster than Groupon. I just signed up 2 Multi Millionaires with many very successful Businesses and Franchises. One of them said “Anyone that doesn’t do this, just does not understand business”, you need to check this out a closed mind is the most expensive thing you can own Hwre i a 2 minute video that explains everything but the latest enhancement of paying you for referrals. http://www.dailyreferralbusiness.com Call me with any questions Ken Jefferson 305-407-1960

http://www.Optirate.com/ Serge Milman | Optirate

Generating true ROI is not easy; growing likes / followers through contests & giveaways is much easier (and may be much more fun). “creative” ROI methods have have been adopted as many practitioners realize that true ROI is more difficult to generate than anticipated. Unfortunately, “creative” ROI tends to evaporate when the bookkeepers reconcile the monthly, quarterly and annual results.

There is only one equation as to how to compute ROI (Return on Investment) regardless of the industry, project, or channel. ROI = (Revenue – Costs) / Investments.

http://www.Optirate.com/ Serge Milman | Optirate

Generating true ROI is not easy; growing likes / followers through contests & giveaways is much easier (and may be much more fun). “creative” ROI methods have have been adopted as many practitioners realize that true ROI is more difficult to generate than anticipated. Unfortunately, “creative” ROI tends to evaporate when the bookkeepers reconcile the monthly, quarterly and annual results.

There is only one equation as to how to compute ROI (Return on Investment) regardless of the industry, project, or channel. ROI = (Revenue – Costs) / Investments.

I agree that ROI is ROI. As the CEO of an organization I want to know what our investment is yielding. As a previous commenter stated, I want to know if the return exceeds what I could have gained on another investment – and of course, does it exceed my cost of capital. Having said that, as my organization is small and my social media initiatives are primarily low-cost brand awareness activities, my “I” (investment) is also fairly insignificant. As such, to feel comfortable with our social media activity I bump up the actual dollars spent (mostly staff time) against the gains in brand awareness and treat the investment as a sort of “loss leader.” Our social media activity has served us very well in obtaining media coverage and other intangibles. While there is value there, it does not necessarily directly play into the “R” of ROI. There are also other intangibles that create benefit but that cannot be separated and thrown into the “R” bucket. Until we can reasonably turn social media into measurable returns we will likely continue to keep the investments nominal. This will allow us to continue to utilize social media while keeping our board satisfied that monies are being invested appropriately.

http://www.Optirate.com/ Serge Milman | Optirate

Jesse – I think that your experience is probably consistent with that of many others – especially in the Community Bank and Credit Union space. What differentiates you from many others is that you describe that ROI is important and that you endeavor to measure it for all initiatives – including social media. That is to be applauded!

What is interesting is that you indicate that your Investment in social media related activities are “fairly insignificant” which may explain the lack-luster “R” in ROI. As you have already discovered, social media tools may be free or low cost, but social media as a channel is far from free. The investment required from skilled subject matter experts to add value to your audience (customers and prospective customers) is not a commodity and has a high price.

It is great to generate media coverage, but what good is this media coverage if it fails to generate incremental business? The lack of “R” may in fact be due to the “insignificant” “I” of your Bank’s initiatives. I encourage you to consider growing the “I” and concentrating it on efforts that have a greater likelihood to result in revenue & profitability. If done correctly, the illusive “R” will be illusive no longer.